The Basics of Inflation

There is a lot of talk of inflation in the economicincreasing their cost and so on. However, higher
news lately. What does it mean?interest rates also encourage people to save more
Most of us understand the basic idea of inflation --and spend less, shortening demand and lowering
things cost more than they used to. In fact, that isprices on items.
pretty close to the Webster's definition. It is whenFor the most part, steady inflation is not seen on a
prices go up. For example, I remember when I couldday-to-day basis. You usually only see it when you
put five dollars of gas in my little truck and drive forlook back. I remember that 85 cent gasoline in high
a week. Nowdays, five dollars gets me less than twoschool. But you made a lot less in your job as well.
gallons of diesel.Why is inflation important to the individual? Well,
Inflation is at work.when you are planning for the long term, it can hurt
Inflation has been pretty steady. Just a nice climb. Inyou a bit.
general, inflation has remained at an average of 3%If you are 30 year old, you are around 30 years
for the past 30 years. We aren't doing that bad --from retirement. You plan to retire at 60 with a
some countries have inflation above 1000% in onemillion dollars. That sounds like a lot of money.
year.It may not be.
Yes, sometimes it jumps, like in the 70's. But inFactor in 3% inflation for 30 years and your million
general, we are doing well.dollars will only buy you around $400,000 worth of
Okay, what causes inflation?goods and services. If you live 20 years after
Inflation can be caused by many factors. Increases inretirement, that's only $20,000 a year to live on.
taxes and government fees can lead to inflation.Sixty percent of your money has gone to inflation.
Things that cost businesses especially cause inflation.Can you live on that? You will need to save
When the cost of a business goes up, the productapproximately $1.8 million and invest it at 5% after
prices go up. When prices go up on products andretirement in order to have the same amount of
services, your income goes down (you are spendingspending money as you do now.
more of it). You have to work harder and longer toSo remember, inflation does really affect you. You
afford the same things. Or hope that you get a costshould consider it when planning for the future. Other
of living adjustment.than that, there isn't much you can do. But you must
Which causes the business costs to go up and it allfactor it in.
starts over again.A quick way to factor in inflation is to subtract the
Inflation also occurs when your personal taxes,3% inflation rate from your assumed rate of return.
property taxes and sales taxes increase. You ask forFor example, if you expect a 13% return on your
an increase in your wages. Then business costs go upinvestment, inflation takes it down to a 10% rate of
and so on.return. This will give you a picture of the value of
When things become rare, inflation can occur. Theyour investment.
more demand on an item, the more expensive itThere are investments out there than benefit from
becomes. For example, if there is a drought andinflation, such as real estate and precious metals.
wheat does poorly, the price of wheat goes up. ThisLook into diversifying your portfolio into different
may cause the price of wheat products to go up.types of assets, not just different types of stocks.
If interest rates increase, inflation can also occur. TheInflation is simply a fact of life. By accounting for it,
cost to borrow money goes up for businesses,you are prepared to fight it in the future.